China's service sector expanded at a marginally faster pace in June, but the reading underscores how the economic recovery remains stuck at low gear as domestic demand falters and the property downturn deepens.
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China non-manufacturing PMI ticks up to 50.2 as recovery stays fragile
China's service sector expanded at a marginally faster pace in June, but the reading underscores how the economic recovery remains stuck at low gear as domestic demand falters and the property downturn deepens.
China's official non-manufacturing Purchasing Managers' Index edged up to 50.2 in June from 50.1 in May, the National Bureau of Statistics said Monday, matching the consensus estimate. The reading marks the second consecutive month of expansion above the 50-point threshold that separates growth from contraction, though the pace remains barely above stall speed.
"The modest improvement in the non-manufacturing PMI reflects some stabilization in services activity, but the data does not signal a meaningful rebound," said Xu Tianchen, senior economist at the Economist Intelligence Unit. "Domestic demand remains the key missing piece in China's recovery story."
The non-manufacturing gauge, which covers services and construction, has hovered near the 50-point line for three consecutive months after dipping to 49.9 in March. The sub-index for new orders likely remained subdued, while the employment component continued to signal contraction, according to economists surveyed before the release. The construction sub-index may have been supported by infrastructure spending, partially offsetting weakness in real estate-related activity.
The official manufacturing PMI, due Tuesday, is expected at 50.1, according to a Reuters poll of 23 economists, barely above the 50-point threshold after May's reading of exactly 50.0. The private-sector RatingDog manufacturing PMI, which places greater emphasis on smaller export-oriented firms, is forecast to ease to 51.6 from 51.8 in May.
AI exports prop up factory activity while consumers hold back
The manufacturing sector has found support from surging global demand for artificial intelligence-related hardware. Exports of automated data processing equipment jumped more than 60 percent year over year in May, while semiconductor and chip-equipment shipments remained robust, helping offset weakness in traditional manufacturing. Furniture exports, a proxy for conventional factory output, grew just 1.9 percent over the same period.
The divergence between high-tech and traditional manufacturing underscores the uneven nature of China's recovery. Retail sales fell in May for the first time in more than three years, signaling that households remain cautious about spending amid a prolonged property downturn and weak labor market conditions. New home prices recorded an even steeper decline in May, extending the contraction in the real estate sector that has weighed on consumer confidence and local government finances.
The People's Bank of China last week set the rate on its new overnight liquidity tool at 1.25 percent, below the 1.35 percent expected by markets, in what economists described as a de facto rate cut aimed at lowering borrowing costs. The central bank also conducted 300 billion yuan ($44 billion) of overnight reverse repurchase agreements, according to a statement, as policymakers grapple with weak credit demand. Sources familiar with the matter said the PBoC has directed several commercial banks to expand lending in June.
What this means for markets
The data suggests China's economy is stabilizing at a low level rather than gaining momentum. With the manufacturing PMI expected to barely cross into expansion territory and the non-manufacturing gauge showing only marginal improvement, the case for additional policy support is building. The PBoC's next decision on the 1-year medium-term lending facility rate, expected in mid-July, will be closely watched for signs of further easing.
For global investors, the tepid readings reinforce the view that China's recovery remains heavily dependent on policy stimulus and AI-driven export demand rather than organic domestic consumption. The CSI 300 Index and the offshore yuan will be sensitive to any downside surprise in the manufacturing PMI on Tuesday, with a reading below 50 likely to trigger renewed selling in China-exposed assets.
This article is for informational purposes only and does not constitute investment advice.
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